Christopher & Banks Corporation (CBKCQ) Earnings Call Transcript & Summary

Greetings. Welcome to Christopher & Banks Corporation Fiscal First Quarter 2020 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Jean Fontana with ICR. Thank you. You may begin.

Thank you. Thank you for joining us today for the Christopher & Banks First Quarter Fiscal 2020 Earnings Conference Call. Presenting on today's call will be Keri Jones, President and Chief Executive Officer; and Richard Bundy, Chief Financial Officer. This morning's conference call is in conjunction with the earnings release that the company issued this morning. During our call today, we will reference certain non-GAAP financial measures, including adjusted items, reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for each measure, which can be found in the press release, including in supplemental financial tables. Today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the company's expectations regarding its future performance, including, but not limited to, the financial condition, results of operations, business initiatives, growth plans and prospects and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to today's earnings release or the company's SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. And with that, I will turn the call over to Keri Jones.

Thank you, Jean. Good morning, everyone, and thank you for joining the Christopher & Banks First Quarter Earnings Call. Over the last 3 months, we've experienced a global health and financial crisis that is more severe than anything we've ever seen before. The health and safety of our associates and our customers will remain a top priority. I would like to thank our associates across the organization for their hard work, agility and dedication to our brand. We are also grateful for our loyal customers who have remained engaged with us throughout these uncertain times. Prior to the COVID-19 pandemic, we were both pleased and highly encouraged with the momentum in our business. We have made tremendous progress across our strategic initiatives, which was reflected in our strong comp growth, our operating margin expansion and our growing customer file. All of these trends pointed to a promising future. These positive trends continued into the first quarter with comparable sales up 4.9% before sales began to slow in March as the pandemic spread, and we closed 100% of our retail locations on March 19. In our eCommerce channel, trends also weakened before rebounding beginning in mid-April, resulting in a 10% decline in sales for the first quarter. As a result, net sales for the first quarter were down 51.5% to $40 million. Once we saw the turn in our sales trends, we acted swiftly and decisively to protect our business and our future. During this period of store closures, we focused on efforts on maintaining engagement with our customers through e-mail as well as social media. One example of this was a new behind-the-brand series campaign that enabled us to connect with our customer on a more personal level. These actions, combined with our omnichannel capabilities, helped to drive the rebound in mid-April, which continued to build through May with quarter-to-date eCommerce sales tracking up 50%. Also encouraging is the number of new customers shopping our brand, and store-only customers who are engaging with us online for the first time. This is an encouraging data point as we know that customers that purchase in both channels spend more over time, so this will help drive volume now and into the future. Cutting costs and reducing cash outflow was also a top priority. We made the difficult decision to furlough 100% of our store associates as well as more than 1/2 of our corporate associates. All merit increases were suspended and all headquarters associates are on a temporary salary reduction. In addition, we moved swiftly to reduce operating expenses and paused all nonessential capital expenditures. We temporarily stopped rent payments during the store closure period, and are in active negotiations with our landlords on a go-forward strategy that will be fair to both parties. We work closely with our merchandise vendor partners to reduce orders and extend payment terms. We canceled as much of our spring and summer inventory as we were able to and held over some of the basic products. However, we have additional spring and summer receipts arriving in the second quarter, and we expect additional merchandise margin pressure as we work through the seasonal product. We expect to approach more normalized inventory levels in the third quarter. In addition, we reduced fall receipts given the uncertainty of consumer demand, and are taking a cautious approach to planning our business for the second half. As a result of the actions we have taken, we are in a position to reopen our stores and resume our strategies, recognizing that we will need to continue to be incredibly agile as we navigate through this unchartered territory. Where we stand today? As of today, we have opened 90% of our store base through a phased reopening plan based on state and local guidelines and in adherence to health and safety measures. We began with a very small number of stores at the end of April and accelerated openings throughout May. We are pleased to see sales volumes building to our expectations. As I mentioned earlier, our eCommerce business has really accelerated. We have not experienced the slowdown in growth since we have opened our stores, and we believe it will continue to grow at a high rate as a result of the continued enhancements we've made in our omnichannel capabilities. As challenging as this situation has been, I believe that our brand will be positioned to thrive as we emerge from the crisis. First, we have an extremely loyal customer base who is telling us that she misses coming into our stores and engaging with our store associates. We have created a special bond with our customer through merchandise that is designed especially for her, in an environment that she loves, and where she connects with her stylist, whom she trusts. Over the last 2 years, we have created an exceptional and differentiated shopping experience for her. Now more than ever, personal relationships and trust are critical, and she finds that within the Christopher & Banks' community. Importantly, given the retail disruption, we believe there will be more opportunities to welcome new customers to Christopher & Banks. Second, we present a great value proposition. With a softening economy, she will choose to spend where she gets great value and service. With an average out-the-door retail of $20 combined with specialty store service, we have an opportunity to gain wallet share of our current customer as well as welcome new customers into our brand. Third, our product offering is suited to her lifestyle. We have always tailored our assortment to a more casual lifestyle, which offers comfort and value. And we believe that this will be even more prevalent as we expect work from home to be part of the new normal. Our brand identity, effortless style for real-life, could not be more appropriate than it is right now. We will continue to emphasize comfort and style with a mix of basic and fashion pieces. And finally, we are an omnichannel retailer with a strong eCommerce business. The work we have done to enhance our eCommerce shopping experience and develop our omnichannel capabilities will enable us to serve customers in whichever way she prefers to shop with us. This week, we launched Stylitics software application, which enables us to assist customers with outfitting online. We are excited to provide this feature to our customers as it is one more way in which we can bring an elevated shopping experience to life on our eCommerce channel. Prior to the pandemic, as we advanced our turnaround strategies, we made progress in deepening our connection with our customers and drawing new and lapsed customers to the brand. As we emerge from this crisis, we see further opportunity to gain market share, given the market disruption and our competitive position within the changing retail landscape. To do this, we will capitalize on our highly loyal customer base, our strong value proposition, our casual comfortable styling as well as leverage our expanded omnichannel capabilities. Based on our current forecast, which includes a $10 million PPP loan, we believe we have an adequate liquidity to navigate this crisis and resume our turnaround strategies. With that, I'll hand the call over to Richard to review the financials.

Thank you, Keri. Good morning, everyone, and thank you for joining us today. Our top priorities have been and continue to be to protect the health and safety of our associates as well as to maintain disciplined cost controls and preserve liquidity as we operate through this uncertain environment. As Keri mentioned, momentum from fiscal 2019 continued into the first quarter with positive comparable sales in February as we made further progress on our strategic initiatives. But beginning in March, our trends turned negative as we begin to see the impact of COVID-19 and temporarily closed all of our store locations. As a result, for the quarter, net sales decreased 51.8% to $40.1 million compared to $83.2 million in last year's first quarter. Gross margin rate decreased to 9.3% from 30.8% in the same period last year. The decrease was primarily the result of deleverage on fixed occupancy expenses despite a $2 million occupancy cost reduction to last year associated with previously negotiated rent savings. The decrease in merchandise margin contributed to approximately 20% of the margin rate decline due to heightened promotional activity on our eCommerce channel as well as reserves of approximately $900,000 associated with excess inventory, resulting largely from temporary store closures related to the impact of COVID-19. Selling, general and administrative expenses decreased 36.5% to $18.5 million compared to $29.2 million in last year's first quarter. We acted quickly to reduce expenses, leading to a $10.6 million reduction in cost for the first quarter. This cost saving was primarily related to the reduction of labor expense resulting from furloughs at the store and corporate levels as well as temporary salary reductions. In addition, we instituted cost reduction measures across all aspects of the business, resulting in $1.9 million in savings. As a percentage of sales, SG&A increased to 46.2% as compared to 35.1% due to deleverage on reduced sales volume despite the lower cost. Depreciation and amortization was $1.9 million compared to $2.4 million in last year's first quarter. The decrease was primarily due to lower depreciation on IT-related systems and a reduction in average store count. We delivered first quarter net loss of $17.2 million or $0.46 per share compared to a net loss for the prior period of $6.2 million or $0.16 per share. Adjusted EBITDA, a non-GAAP measure, decreased to negative $14.9 million compared to negative $3 million for the same period last year. Now turning to the balance sheet. Cash and cash equivalents totaled $0.2 million with $16.8 million in outstanding borrowings and net availability of $4.1 million under the credit facility as of the end of the first quarter. We also have $5 million drawn on the term loan facility, which allows for an aggregate principal amount of up to $10 million. The first quarter is traditionally our highest cash burn quarter due to seasonal inventory investments and timing of payments. As we move through the quarter, we started to see the benefits of our expense reductions, inventory actions and cash management activities. As a result, cash burn slowed greatly in April and continued into May. And as stores reopen in the second quarter, we expect to see cash flows stabilize. We also will realize the benefit of the $10 million PPP loan, which is forgivable, as long as we use the cash for qualified expenses, which we intend to do. Total inventory was $47.4 million at the end of the first quarter of 2020, up 3.7% compared to the $45.7 million at the end of the same period last year. While we executed large cancellations for spring/summer orders, we still have receipts coming in for summer that will result in heightened inventory in the second quarter. As we work through this product, we anticipate additional merchandise margin pressure in the second quarter before we return to more normalized inventory levels in the fall. Capital expenditures for the first quarter of 2020 were $400,000 compared to $600,000 in last year's first quarter. This primarily reflects store investments. We paused nonessential CapEx for the remainder of the year. We opened 3 stores during the first quarter and closed 2. And 1 additional store was opened on June 1, and we plan to open another 3 stores this year. These locations were under construction prior to the pandemic. The 2 remaining stores that we had planned for fiscal 2020 are on hold at this time. The last few months, we have faced a tremendously challenging and unprecedented time. We responded quickly and assertively to reduce expenses, negotiate with our vendors and landlords and gain access to capital. As a result of these actions, the improved cash position we expect as we continue to reopen stores in the second quarter and the $10 million PPP loan amount, we believe we have sufficient liquidity to operate the business. While the environment continues to be challenging, we remain committed to the execution of our strategies and to protecting our cash as we navigate through the uncertainty. Now we will turn the call over to the operator to begin the Q&A session.

[Operator Instructions] Our first question is from Eric Beder with Wunderlich Securities (sic) [ SCC Research ].

Could you talk about the productivity in terms of profitability of the online shopper versus the store shopper? As that switch goes forward, how should we be thinking about how margins can change as it somewhere normalizes going forward?

Yes. As far as the online customer, I mean, we see -- really, the benefit is when she's shopping both channels, she spends more. There's not a real distinction, I think, in the profitability of an online-only customer versus a store customer. Both channels have similar flow through for us.

Okay. And when you look at -- I know you got back on receipts for fall and for winter. How -- if things change and go back to somewhat what you expected them to be, how quickly can you react if you need to get more inventory or more product for the -- for that segment?

Eric, I think given the market situation, there'll be plenty of goods available. And so we feel the conservative approach for now is best.

And when you look at the store base, you opened 90% of the stores, another 10% are probably, I would assume, in areas that can't open right now. Where is -- have you changed what you think about in terms of amount of stores you need going forward longer term? How has this changed? Obviously, the online has gotten bigger and you want to convert them to both. But how do you think going forward kind of that level of store base and where you think it should go?

Yes. I think what we've seen is nothing has changed our viewpoint on where our store footprint is right now. We feel that our store count is pretty good at the level we're at right now. We have seen good response in smaller and rural markets bounced back a little bit faster than in some of the more metro areas, but we feel our store count is positioned well.

Congrats on weathering the highly uncertain times.

I would now like to turn the conference back over to Keri for closing remarks.

Thank you for joining us today. We look forward to updating you on our progress at our next call. Thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.